100% offset versus line of credit

Q. My question relates to the abilities of 100% offset and revolving line of credit home loans to reduce the amount of interest payable by offsetting the balance of surplus funds against the principal of the loan prior to interest being charged. I’m unsure as to whether a revolving line of credit loan has anything over the 100% offset, given the same interest-reducing mechanism seems to be a feature of both.

A. A line of credit usually allows you to make minimum repayments equal to the interest-only amount – although sometimes for the first 10 years of the loan only. The maximum credit a line of credit will allow is given as a percentage of the value of the property, usually 75–80%. The major distinction from an all-in-one loan is that a line of credit has a maximum credit limit. You should be able to continually draw back or down to this credit limit for the life of the loan or the first 10 years. Most institutions call this a ‘revolving’ line of credit.

An all-in-one loan is basically a loan combined with a daily transaction account. A 100% offset facility has a separate daily transaction account. All-in-one and 100% offset accounts work on the same principle – the additional repayments made above the minimum repayments are used to reduce the balance of the loan on which interest is calculated. You can deposit any income into the account, use either facility as a daily transaction account, and not be penalised by minimum withdrawal amounts or excessive withdrawal fees (apart from the standard ATM charges). The only funds available/accessible for withdrawal or redraw from an all-in-one loan are the additional payments.

A line of credit can operate as an all-in-one loan. It may have a minimum redraw amount ($50–2,000) and may have a redraw or withdrawal fee (typical maximum of $50).

Assuming the rates and ongoing costs are the same, you are permitted to make more than interest-only repayments on a line of credit, and there is no minimum redraw amount or redraw fee, then the overall interest reduction should be the same. However, lines of credit often have higher rates or ongoing fees, approval may be more difficult, they often offer a lower LVR amount, and they are usually not available with mortgage insurance.

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